3.4.4 Oligopoly Flashcards
(22 cards)
What are the characteristics of an oligopoly
Few firms dominate the market
differentiated goods
High barriers to entry and exit
asymmetric information
interdependence
profit maximisation as sole objective
high competitive prices
Real-life examples of an Oligopoly
soft drink industry, car industry, oil exporting
Describe the graph for Oligopolies
Oligopolies have a bent AR curve
Why
Shows that firms don’t want or need to change their prices
If firms raised prices (P1-P2), the rest of firms will not follow to undercut this firm
If a firm lowers prices, other firms will follow looking to protect their market share – price wars
When can a cost change not result in a change of price for an Oligopoly
Within the vertical red gap
As they still charge where (MC=MR)
What are the three conclusions you can draw for an Oligopoly
- Price competitors – Firms may reduce prices to gain market share
- Non-price competitor – prices are rigid, so competition other ways
- Temptation to collude – remove worry rivals will react- almost like a monopoly
What is the concentration ratio
How do you work it out
Is the collective market share of the largest firms in the industry
∑ n market shares
What is the problem with concentration ratio
where u don’t know individual dominance
we don’t know if one is really dominating and taking majority of market share
What factors promote a competitive Oligopoly
Many firms/Low concentration ratio leads to collusion being more difficult
Supernormal profits encourage new market entry
costs advantages of one firm may make it difficult to set a price
price war could lead to lower prices
How would you evaluate a competitive Oligopoly
As a perfectly competitive market
Collusive Oligopoly can have Overt or Tacit agreements on price
What does Overt and Tacit Mean
•Overt – formal agreement (illegal)
Tactic – informal agreement – leads to price fixing where other firms follow the dominant firm in price leadership
Factors promoting a collusive oligopoly
Small number of firms – so easy to do
similar costs
high entry barriers
ineffective completion policy
consumer loyalty
How would you evaluate a collusive Oligopoly
as a Monopoly
How does game theory relate to Oligopolies
the decision to compete or to collude
Game theory highlights the temptation to cheat in a cartel
What is the Nash Equilibrium in Game theory
cell with two same numbers as a ‘rational’ equilibrium which can last in long run – but not best outcome
(both go low)
What is the Dominant strategy in Game Theory
for both firms to compete as it will always be the winner
What can cause price wars
Collapse of a cartel
perceptions some firms are making too high supernormal profits
desire to win market share
entry of new firms
managerial motives in a divide of ownership+control
Winners of price wars
Regular customers – real income falls with lower prices
Managers – possible higher sales could increase their bonus income
Firms – use up their spare capacity
Losers of price wars
•Shareholders – lowers profits and reduced dividends in short term
Supplier: may be squeezed and forced to lower their prices
Is price-cutting beneficial?
What does it depend on
- Depends on reaction of rival firms in industry
- Depends on price elasticity of demand
- Departure from profit maximisation
- Important for defending market share – however depends where these cost cutting measures are taking place
- However consumers may expect lower prices, damaging brand value
- May affect dynamic efficiency
What is predatory pricing
Is a deliberate strategy of driving competitors out of the market by setting low prices or possibly below AVC
(Short-run loss)
Is illegal
What is limit pricing
Is to deter entry or expansion of fringe firms
Level is just below short-run profit maximising price (MC=MR) but above competition level (MC=AR)
Designed as a barrier to entry
